[SOLVED (maybe)] Dynamic SquashFS image

Is a SquashFS Image with dynamic capacity/allocation possible (similar to the virtual disks in vms being dynamically allocated)

Here's my situation and why I want what I do:

I have a file server with 12TB of total storage, roughly halfway filled. I keep backups of customer files on this server, in addition to my personal files - I like to keep my customer's files in a luks encrypted image - for their security, and mine. Some of my personal files are stored in this encrypted image, as well as directly available on the server. The server is starting to get filled up so I want to try and save a little space. As the customer files are usually either text files (around 200gb of them right now) or disk images of degrading disks etc.. I could potentially save a large amount of data using compression - unfortunately I need to be able to access the files directly, on the fly, and edit them as required, so tossing them in archives isn't really an option.

Can I create a Squash image that has an initial size of ~10mb or so, and have it expand to contain any and all data I toss at it? So that the on disk size is as small as required? This way I can mount the squash image, and then mount the contained Luks encrypted image. The Luks encrypted image is currently 1TB, with roughly 50% of it free space, not including the free space contained in the raw image files. This makes it 1TB on disk, when it could be probably around 150gb or lower.

EDIT:

Totally spaced sparse files... since the native filesystem supports them I should be able to create a sparse file 1TB in "size", do a "quick" format to squashfs and copy data to it with it expanding up to (but not exceeding) the total desired size.